Accidental landlords advised to consider selling BEFORE April 2014

by Neil Patterson

15:45 PM, 11th December 2013
About 7 years ago

Accidental landlords advised to consider selling BEFORE April 2014

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Accidental landlords advised to consider selling BEFORE April 2014

Accidental landlords looking to sell and take advantage of tax breaks on former main residences are being advised of the importance of doing so before April 2014.

The Chancellor George Osborne confirmed in his Autumn Statement that Capital Gains Tax relief on former homes will be halved from 36 to 18 months when the new tax year begins on 6th April 2014.

If at some point a property has been your Principal Private Residence you are entitled to claim PPR relief available on the sale of a property. The last three years (18 months as of April 2014) of ownership are exempt in calculating Capital Gains Tax (CGT), whether the individual is living there at the time of selling or not.

It is important to note that PPR relief claims are often investigated by HMRC. It is, therefore, imperative to be able to prove beyond any shadow of doubt that the property was indeed your Principal Private Residence. Examples of how this can be achieved are Council Tax records, bank statements, voters roll, utility bills, doctors and dentists records etc. The more evidence the better of course.

Let’s look at two examples of selling a property claiming PPR relief before and after April 2014:

1. Property is purchased 10 years ago for £100,000 and was at some point your principle private residence. It is then sold for £200,000 10 years later making a taxable gain of £100,000

  • PPR relief at 36 months would mean the gain is now reduced by the ratio of time owned minus 3 years. Therefore taxable gain now equals 84/120 x £100,00 = £70,000 (effectively PPR relief = £30,000)
  • On top of this you can claim “letting relief” which is the lesser of the PPR relief or a maximum of £40,000. Therefore in this example Letting relief equals the PPR figure of £30,000
  • Therefore Total taxable gain in this example equals £70,000 – £30,000 (Letting relief) = £40,000
  • However it gets better if the property is jointly owned as each owner is able to claim the same Letting relief of £30,000. Therefore taxable gain now equals £70,000 – £30,000 – £30,000 = £10,000

2. Same example, but PPR relief is now only 18 months post April 2014

  • PPR relief would now mean taxable gain equals 102/120 x £100,00 = £85,000 (PPR relief = £15,000)
  • Letting relief is now the lesser of the PPR figure or £40,000. Therefore Letting relief now equals £15,000
  • Therefore Total taxable gain in this example equals £85,000 – £15,000 (Letting relief) = £70,000
  • However if the property is jointly owned as each owner is able to claim the same Letting relief of £15,000. Therefore taxable gain now equals £85,000 – £15,000 – £15,000 = £55,000

In Summary:

  • Pre April 2014 taxable gain for a sole owner of the above example = £40,000 or for joint owners £10,000
  • Post April 2014 taxable gain for sole owner = £70,000 or for joint owners £55,000
  • When the length of time the property has been owned is shorter than 120 months the percentage difference between the two examples will be greater.

Don’t forget that each owner get’s a CGT annual exemption which can also be used. As of August 2013 that figure is £10,600 per person, which can be taken off the total taxable gain if it has not already been used elsewhere that year. This is a VERY good reason to take professional advice. The cost of the advice could well represent only a fraction of the tax savings.

If instead of being an Accidental landlord you have moved into a BTL property at some point prior to sale to take advantage of the above reliefs it can be more difficult to prove residence.

Neil Barlow, an accountant for Pacific Limited, has therefore provided example cases below where landlords failed to prove entitlement to PPR relief:

“It is well known that the test as to whether a property has been used as a residence for the purposes of the valuable CGT private residence relief is based on quality of occupation rather than quantity.

An interesting case on the time aspect was Paul Flavell v HMRC TC00642. The taxpayer lost his claim for PPR relief because the Tribunal decided that there was no evidence to show that the taxpayer had ever lived in the property. They said “if evidence had been provided to support the claim of living at the property for 5 months, they would have found that to be sufficient for the claim”.

“It is also clear that for any chance of success proper evidence is required to establish use as a residence.

P Moore v HMRC TC02827 is the latest case on the issue and is cause for concern.

1. The taxpayer bought a property and let it for four years. The tenant moved out in November 2006, and the taxpayer moved in because his marriage was in difficulties.

2. He sold the house at the end of August 2007, having put it on the market in April. He claimed PPR on the gain on the basis that he had lived at the property for 8 months, having not put it on the market until he had lived there for 3 to 5 months.

3. HMRC argued that the taxpayer’s occupation did not have a sufficient degree of permanence, and no relief was due.

4. The First-tier Tribunal decided the taxpayer did not have the intention of staying in the house for a considerable period as evidenced by the fact that he had not arranged to have correspondence sent to the address while living there, choosing instead to have it forwarded to his new partner’s home.

5. His latest relationship was the crucial factor. Whilst the taxpayer may have been prepared to stay in his property for some time, the tribunal found it hard to accept he had “no serious hope or expectation” of setting up home with his partner (later to become his wife) before March 2007, given the fact that the couple put in an offer shortly after that date to purchase a new house.

6. In addition the taxpayer did not fully change his postal address and he told HMRC in writing that his occupation was temporary.

7. Finally, the Tribunal wanted to see if his new wife would collaborate the story but she did not attend the hearing.”

If you want advice

This article should not be construed as advice. The firm we use for accountancy and tax advice specialise in advising on the affairs of property based entrepreneurs. They are a boutique firm based in Norwich but they act for clients throughout the UK. One major advantage of using a smaller boutique firm in the provinces is price. Having said that I don’t believe you will ever find better advice from a big six firm in the capital regardless of how much you pay. If you would like an introduction please complete the form below.Accidental landlords

Accountants Introduction Request



Comments

Mark Alexander

15:51 PM, 11th December 2013
About 7 years ago

Neil, this is the best article you have ever written in my opinion.

I actually managed to get to the end of this one without falling asleep.

Just kidding mate, the economics articles are are great too, I'm just to dim to understand all the big words LOL

In all seriousness, I think your advice to accidental landlords is absolutely spot on!
.

Jeremy Smith

16:52 PM, 11th December 2013
About 7 years ago

I knew about the 36 month rule if it is your private residence, but I've never heard of lettings relief.
Why would the HMRC be so generous to give us that, and then to give it a second time if there are joint owners?
Perhaps I shouldn't ask too much !! - Just be grateful !!

My Question:
Does the sale have to be completed by the 5th April ? - I guess it does.
That doesn't give us very much time from now to sort out the odd jobs, and get it on the market and sold.
- considering alot of solicitors will faff about for up to 3 months.

Neil Patterson

17:00 PM, 11th December 2013
About 7 years ago

Hi Jeremy,

Unfortunately yes otherwise you would have no cut off date as you could say you put it on the market on the 4th of April and actually sell any time after.

Mark Alexander

17:32 PM, 11th December 2013
About 7 years ago

Reply to the comment left by "Jeremy Smith" at "11/12/2013 - 16:52":

Jeremy Shhhh!!!

The government are halving the tax relief already, PLEASE don't use the word generous LOL

Regarding timescales, yes it's tough but I can imagine that several people will get together and trade like for like properties before the April 5th deadline and a few more will be pushing their solicitors to complete sales very hard as the deadline fast approaches.
.

Mark Alexander

17:35 PM, 11th December 2013
About 7 years ago

Reply to the comment left by "Mark Alexander" at "11/12/2013 - 17:32":

PS - the political hot potato is why are UK residents are only being given until April 2014 to restructure their affairs but foreign investors are getting an extra year?
.

Mick Roberts

17:36 PM, 11th December 2013
About 7 years ago

Yeah Brilliant reading, I've read a few of these & that was pretty simple easy to absorb, even for common HB Landlord like me.

I have question which may appear silly, but they're only easy if u know the answer. I'm currently selling some houses.
One, I've more or less sold to mate with tenant in. I'm structuring the sale so we complete on the 6th April, so me & fit wife missus get our 21k Capital Gains Tax allowance. Any problems with this?
Could Taxman say 'Aah, but you've sold before 6th April, just received the money on this date.' ?

I've had dealings with Taxman & invoices that's dated 20 March for example, but I only received & paid 10 April, Taxman wants 'em going to the previous year.

And same with rents, if received 10 April, & they are for the 4 weeks backwards, he want's em proportioning for previous tax year.

Mark Alexander

17:47 PM, 11th December 2013
About 7 years ago

Reply to the comment left by "Mick Roberts" at "11/12/2013 - 17:36":

Hi Mick, no such issues to worry about with CGT because the gain is only made when the sale completes. Do check with your solicitor and accountant though as we are not insured to give you professional advice.

Ask whether exchange of contracts constitutes the sale and if it does make sure you exchange and complete on the same day. That's always safer on BTL deals I reckon anyway, just in case the lender withdraws an offer for example.
.

Adam Hosker

17:47 PM, 11th December 2013
About 7 years ago

Mr Smith, If CGT is a concern there is the possibility of selling the property to an SPV in which you are in control. This should cut out the process of finding a buyer - although not an ideal solution - to lower a tax bill.

Great Post Neil.

Carol Thomas

18:43 PM, 11th December 2013
About 7 years ago

Reply to the comment left by "Adam Hosker" at "11/12/2013 - 17:47":

Hi Adam, I'm not a newbie landlord but I am one of probably many who have not had the benefit off property118 for very long and have therefore bumbled along without too much knowledge of the PRS. I have looked up the meaning of SPV but what I don't know is 1) in what circumstances would I need an SPV and if I needed one - 2) how would I set it up? Your advice on this matter would be appreciated. By the way, I currently have 5 BTL properties, four with regular tenants and one rented to my Father at a reduced rent. Thanking you in advance......

Neil Patterson

8:43 AM, 12th December 2013
About 7 years ago

Reply to the comment left by "CaZ " at "11/12/2013 - 18:43":

Hi Caz,

SPV stands for a limited company that is a "Single purpose vehicle" or sometimes termed as a "Special purpose vehicle".

What that means is the company is registered at companies house to only conduct one type of trade/business ie property development as an example. Companies house use what they call SIC codes to describe the type of trade so if you look up a SPV company they will only have one SIC code.

The reasons you would use a SPV limited company as a Landlord are very complicated and specific to individuals. In most cases you are usually better of buying property in your individual names, but you need a good accountant to make a decision as to why you would use a limited company unless you already have one.

SPVs are also more popular with Landlords than trading companies who can operate in any business, because only a few standard BTL lenders will lend to limited companies and they nearly always want them to be SPVs. If you chose to purchase in the name of a limited company you drasticly reduce the number of lenders you can use especially after the credit crunch.

Although funnily enough I got a call from CHL yesterday who were big in the Ltd co market pre crunch to say they were re entering the market soon 🙂

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